Inclusion, Changing Preferences, and Public Policy

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Inclusion, Changing Preferences, and Public Policy

• Nicholas Stern
• 2nd Permanent Secretary to HM Treasury and Head
  of the Government Economic Service

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Overview

1. Development as a process of change
2. A strategy for development two pillars
3. Spotlight on the second pillar promoting
   empowerment, participation, and inclusion
4. The dynamics of preferences
5. Concluding comments on expanding theory of public
   policy

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Part I Development as a Process of Change

• Progress on living standards beneficial change
  in the developing world
• Meanings what poor people say conceptual
  frameworks.
• Dramatic changes in education and health over the
  last 30 years
• Perspective over two centuries

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Development as a Process of Change
First fall in absolute numbers in 2 centuries
dominated by East Asia
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Development as a Process of Change

• What does change not consist of?
• Progress has not resulted from steady
  accumulation of capital (physical or human or
  social) within a static or dynamically simplistic
  single-good framework
• Formal models of growth and development are
  usually superficial or silent on the most
  important features of the development process

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Development as a Process of Change

• Instead, development characterized by
• Fits and starts in growth
• Massive structural changes in economy and society
• Global integration
• Striking changes in preferences and behaviour
  (focus of todays discussion) and ways of living

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Part II A Strategy for Development

• Lessons of 50 years of development on spurring
  the right type of changes
• Two-pillar strategy for development
• Pillar 1 Improving the investment climate
• Pillar 2 Empowering poor people and promoting
  participation in development

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A Strategy for Development

• Governance, institutions, and behaviour central
  to both pillars
• Each of governance, institutions, and behaviour
  has a conceptually distinct role, although they
  overlap and interact
• Behaviour is often missing from story

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A Strategy for Development

• Pillar 1 Improving investment climate
• Purpose
• Build a climate promoting growth, employment, and
  innovation in private sector
• Emphasises farms and small enterprises
• Elements of that climate
• Stable macro and openness
• Infrastructure
• Governance and institutions

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Part III Empowerment and Participation

• What does empowerment mean?
• Gaining control over ones own life
• Essential to development effectiveness
• In management of schools and water projects
• In security of property rights
• In improvements in health status
• In monitoring government performance
• And it is central to poor peoples definition of
  their poverty (Voices of the Poor)

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Empowerment and Participation

• Empowerment having the ability to shape ones
  life, or to participate effectively (ingredients)
• Determinants of /constraints on empowerment
• Poor individual endowments HD
• External constraints created by family, social,
  cultural, and political context
• Internal constraints the lack of a capacity to
  aspire

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Empowerment and Participation
Determinants of Empowerment

• Individual Endowments
• Assets
• Human Capital

• External Constraints
• Family
• Community (Caste, Religion)
• Society
• Governance

Empowerment

• Internal Constraints
• Perceptions of own role
• Preferences
• Capacity to aspire

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Empowerment and Participation

• Empowerment and inclusion similar but not
  identical concepts
• Empowerment is relevant even when we look at
  individual in isolation
• Inclusion focuses on
• social interactions within a community
• action by agents who may force exclusion
• factors that go across generations
• In practice, both often identify key policy
  issues and challenges and imply similar policies

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Empowerment and Participation

• Can we measure empowerment?
• Household surveys
• Focus on outcomes, including HD outcomes
• Need to disaggregate by social status, gender
• Surveys of governance
• Surveys of attitudes and aspirations
• Surveys measuring shocks, such as natural
  disasters and crime
• Surveys of public service delivery (QSDS/PETS)

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Part IV The Dynamics of Preferences

• Empowerment will often be associated with
  changing preferences
• Indeed, policies to enhance empowerment are often
  focused on changing preferences/behaviour
• Distinguish preferences and behaviour
• Development is accompanied by momentous changes
  in preferences (with rural-urban migration,
  education of women, etc.)
• This makes increasingly untenable the
  comprehensive assumption of constant preferences

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The Dynamics of Preferences

• Why preference change matters five examples
• Shift in attitudes with industrialisation or
  urbanisation (Tawney)
• Promoting the education of girls
• Attitudes toward women in the workforce
• Race relations
• Changing standards in economic transitions

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The Dynamics of Preferences

• Assessing reforms or optimising policy with fixed
  preferences
• Very fruitful approach for much of modelling and
  policy (e.g., theory of taxation and economic
  regulation)
• Behaviours in terms of actions change if
  incentives or information change in a manner
  modelled via fixed preferences
• If a state of affairs is preferred by one
  individual and not ranked lower by any other, it
  is socially preferred (SWF is based- positively-
  on individual preferences)
• Provides clear answers

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The Dynamics of Preferences

• Without the constant-preference assumption, we
  have 2 options for understanding behaviour
• Retain formal preferences and model how
  preferences change over time
• Abandon preferences, and focus on understanding
  how opportunities capabilities change over time
• Different approaches to policy are associated
  with these approaches
• For the former, we have to decide how to treat
  (e.g., weight) conflicting preferences
• For the latter, we have to be able to identify
  expansions of ability to shape own life
• Both approaches will leave important ambiguities

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The Dynamics of Preferences

• First approach attempt to integrate into
  neoclassical public economics
• Retains preference orderings, and struggles to
  make comparisons
• Examples
• Meta-utility function
• Utility function with preferences over
  fundamental goods or wants
• Experience effects

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The Dynamics of Preferences

• The challenge of assessing well-being when
  preferences change
• To judge the welfare effects of a policy, should
  we use todays preferences, or tomorrows or
  something else?

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The Dynamics of Preferences

• To assess policy change in this type of approach
  often requires something akin to paternalism
• State acts in support of higher self against
  wishes of lower self, when preferences are
  expected to evolve
• State overrides preferences where it believes
  they should be changed
• May be some mileage in partial orderings where
  rankings relative to two preference orderings are
  consistent, but strong interest in cases where
  there is conflict in rankings

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The Dynamics of Preferences

• Alternative approach focuses on processes e.g.
  Austrian school/ Sen approach
• Looks beyond preference orderings
• Works in terms of freedoms and capabilities,
  rather than utilities
• Provides a new basis for policy advice assess
  development effects in terms of expanding freedoms

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The Dynamics of Preferences

• Expansion of freedoms as a criterion for policy
  choice has a basis in some strands of political
  philosophy
• Nozicks view asserts inviolable freedoms
• Berlins assessments of states, governments and
  policies but insistence on pluralism and
  warnings on simplistic, single-criterion,
  formulations of decision-making

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The Dynamics of Preferences

• Implication of the Austrian/Sen approach
• Focus of policymaking should be less on comparing
  outcomes
• And more on processes for decisionmaking
• Examples
• Ait Iktel in Morocco
• Sonagachi anti-AIDS efforts in Kolkata

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The Dynamics of Preferences

• Validity or legitimacy of action to change
  preferences again processes
• Examples show the importance of building mutual
  trust through co-operation and mutual commitment
• Connects to literature of Tocqueville, Mill,
  Dewey on political interaction and changing
  preferences
• Market itself is an arena for these social
  processes

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The Dynamics of Preferences

• Viewing social actions this way has profound
  implications for preference change and policy
  choice
• Not top-down preference change, but processes of
  social decision making
• There are many challenges in implementation,
  particularly where inequalities and exclusion are
  severe

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Part V Concluding Comments

• Evidence of development as fundamental change
  plus objectives in terms of empowerment
  inclusion point to strategy focusing on
  processes, as exemplified by two pillars here
• Together the evidence, objectives, and strategy
  lead us to re-examine basics of theory of public
  policy
• Much of development policy is, or should be,
  focused on changing institutions preferences

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Part V Concluding Comments

• Have focused here on changing preferences
• Changing institutions/governance is another
  lecture
• But we have learned something on changing
  governance
• transparency
• economic structure avoiding discretion
• civil service reform
• leadership

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Concluding Comments

• If we follow this analysis and direction through,
  we will create a new approach to the theory
  practice of public policy which builds on but
  goes far beyond standard public economics
• At same time will bring different social sciences
  together in understanding policy and the role of
  the state